Muzinich Weekly Market Comment: U-turns

December 1, 2025

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It was a short week due to the Thanksgiving holiday in the US. However, market price action was supportive as positive sentiment returned and our preferred sentiment index, the VIX, fell sharply back below 17 from a high-stress level of 25, the previous week.

The resulting “U-turn” in price action helped reverse some of the month-to-date losses: government bond markets bull-flattened, credit spreads tightened, the US dollar weakened, digital assets posted solid gains, commodity prices pushed higher, and major equity indices fully recovered from last week’s declines.

Behind the shift in sentiment was continued positive momentum in geopolitics, “U-turns” in policy expectations, and a renewed “buy-the-dip” mentality among risk takers. Key geopolitical developments included signs that Russia and Ukraine may be moving closer to a potential resolution of their conflict, and confirmation from the White House of President Trump’s planned visit to China in April.

On the policy front, investors made a “U-turn” on expectations for the December Federal Open Market Committee (FOMC) meeting, with the implied probability of a 25-basis point rate cut rising to 93%, up from 44% the previous week. ^[1] This shift was driven by signs of cooling consumer sentiment, reflected in softer retail sales and weaker consumer confidence reports. At the same time, wholesale price data showed lower-than-expected inflation, suggesting that companies – concerned that higher costs could alienate customers – were limiting the extent of price increases to offset higher import duties.

The deteriorating trend in economic data was backed up by several FOMC members voicing support for a December cut, most notably New York Fed President (and FOMC Vice Chair) John Williams, whose remarks at the Central Bank of Chile Centennial Conference were widely interpreted as reinforcing the case for further easing in the near term. He noted that downside risks to employment have increased as the labor market has cooled, while upside risks to inflation have eased somewhat. ^[2]

In the UK, Chancellor of the Exchequer Rachel Reeves delivered the much-anticipated Autumn Budget, which was broadly supportive for both bond vigilantes and the Bank of England. The Chancellor announced a further £26bn in tax increases to help cover the costs of her own party’s “U-turns” on pension reform, energy policy, and childcare. According to the Institute for Fiscal Studies, her two budgets over the past 13 months have raised taxes by more than any government since at least 1970, with the overall tax take projected to rise to a record 38.3% of GDP. ^[3]

Bond markets took comfort from the Office for Budget Responsibility (OBR) report, which now projects borrowing to fall from 4.5% of GDP in 2025–26, to 1.9% in 2030–31. On the government’s debt rule –that public sector net debt must fall as a share of GDP in year five of the forecast – the OBR increased the “cushion” for meeting the target to £22bn, up from £10bn in March. This implies a 59% probability of the rule being met, the highest since before the pandemic. Even so, the OBR projects no meaningful improvement in indebtedness, which remains broadly stable, rising slightly from 95% of GDP this year, to 96% by the end of the decade. ^[4]

The budget was welcomed by the Bank of England, which has been grappling with stubbornly high inflation. The OBR now projects inflation to fall to 2.5% in 2026, although this is 0.4 percentage points higher than its March forecast, mainly due to higher food prices and service costs. However, the report noted that the Chancellor’s package – including a freeze on rail fares, a further year of fuel duty relief for motorists, and measures to reduce household energy bills – is expected to lower inflation by around 0.3% in 2026.^[4]

However, the consequences of the government’s more aggressive tax take are now clearly visible in the growth projections. The OBR has downgraded growth in every remaining year of the Parliament, and now expects the economy to expand by an average of 1.5% over the forecast period, around 0.3% slower than projected in March (see Chart of the Week).^[4] This suggests the government is falling short of its election manifesto pledge to kick-start a durable economic expansion by effectively addressing the UK’s longer-term growth challenges.

The overnight interest rate market is now assigning an 89% probability that the Bank of England will cut policy rates in December, with the neutral policy rate expected to be reached in 2026 at around 3.25%.^[1]

Chart of the Week: The effects of higher taxation on growth in the UK

Source: OBR Economic and Fiscal Outlook as of November 26, 2025. Yellow = April 2025, Blue = November 2025. For illustrative purposes only.

References

[1] Bloomberg as of November 28, 2025
[2] Federal Reserve Bank from New York as of November 21, 2025
[3] Bloomberg, ‘Reeve’s budget wins the day, but stores up future problems’ as of November 26, 2025
[4] OBR Economic and fiscal outlook as of November 26, 2025

 

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